Book Review: The Founders and Finance

Few issues divided the American people more after the Revolution than public finance and the direction of the American economy. Harvard Business School professor Thomas McCraw (who died in November) has written an enlightening book about the origins of the American financial system and the men who played a pivotal role in shaping it.

In The Founders and Finance: How Hamilton, Gallatin and Other Immigrants Forged a New Economy, McCraw shows the economic principles of America’s first two political “parties”, the Federalists and Republicans (no relation to the modern GOP), through the eyes of each sides’ greatest economic minds. McCraw also makes the case for what he calls, “immigrant exceptionalism”. Both Hamilton and Gallatin were born in other counties, and four of America’s first six treasury secretaries were immigrants. Clearly, many immigrants at the time brought important financial skills that were uncommon for most American leaders.

Alexander Hamilton represents the “Federalist” and Albert Gallatin the “Republican” point of view of the early American republic. While Hamilton and Gallatin held dramatically different political views, both masterfully handled the treasury department in ways that allowed their respective parties to execute their visions for economic development.

Founders and Finance is broken down into three parts. The part one is about Hamilton, part two about Gallatin and part three is an overview of how American finance capitalism was established in the United States.

Hamilton has received a lot of attention in recent years from historians and biographers, and most of the material in this book seems to be a bit of a rehash of Ron Chernow’s 2005 award-winning biography of Hamilton. Nevertheless, McCraw does a great job explaining Hamilton’s humble upbringing on the Caribbean island of Nevis, his career as a soldier in the Continental Army and his rise into one of America’s greatest statesmen.

Hamilton lived a hard life with much heartache. He was orphaned at a young age and worked for a merchant as a boy to survive in the miserable conditions of Caribbean life. It is clear that his work in bookkeeping and business management gave Hamilton a set of skills that would set him apart from many of the other Founding Fathers. Hamilton couldn’t rely on inherited wealth and family connections like Thomas Jefferson, James Madison and the Lees of Virginia.

Hamilton made his way to the United States through the help of friends that recognized his prodigious talent. After receiving a truncated education, he served in the Continental Army during the American Revolution. Hamilton, in his early twenties, quickly rose to become George Washington’s chief aide. Even at this time Hamilton not only recognized the raw potential of America, but also the fledgling country’s potential to shatter and collapse. He believed that for the union of states to survive the emerging country would need a stronger foundational document and stable finances.

After the war, Hamilton led the charge in creating and ratifying the Constitution. He represented the strong nationalist wing at the constitutional convention and worked in his adopted home state of New York to get the document ratified. Hamilton wrote about two-thirds of the famed Federalist Papers, which still remain, over 200 years later, the best source of information about the nature of the Constitution and the nationalist, federalist side of the debate (as opposed to the anti-federalists, who desired a much weaker central government).

Hamilton was appointed the first treasury secretary of the United States by George Washington. From that post, he acted almost as Prime Minister in the Washington administration, creating and directing policy, much to the consternation of Secretary of State Thomas Jefferson, who opposed most of Hamilton’s ideas.

Through his Report on Public Credit and Report on Manufactures, Hamilton introduced his plan to create a stronger nation to Congress. He wanted to create a stronger national union cemented by a national debt to bind the states and create liquid capital, moderate tariffs and direct excise taxes (on whiskey) to fund it, as well as a national bank to regulate the nation’s finances and act as the country’s chief lender. Hamilton dreamt of an America built on a similar model to Great Britain, with a strong financial sector, diversified industry and powerful military for defense.

It must be noted that Hamilton did not believe in an overburdening debt and high taxes, as he believed both of these policies would be economically destructive. He merely wanted to put America on strong, stable financial footing and provide the infant country a way of defending its newly won independence.

Jefferson was horrified by Hamilton’s plan, hated the possibility that America would be similar to Britain, and thought even a small national debt to be a curse and not a blessing. Jefferson began to work with other like-minded individuals to create America’s first opposition party, the “Republicans,” to oppose Hamilton’s “Federalists”.

Jefferson and Madison are often recognized at the leaders of this party, but a third man was perhaps the most integral in creating the economic and policy agenda of the Republicans. Albert Gallatin, an immigrant from Geneva who lived on the frontier of western Pennsylvania, was perhaps the only man in America who understood economics as well as Hamilton and could successfully carry out the Republican economic agenda. Gallatin, with Jefferson and Madison, formed a “great triumvirate” that would dominate American politics from Jefferson’s election in 1800 through the early nineteenth century.

This part of McGraw’s book really shines, as he brings to life an often neglected Founding Father and puts him at the cornerstone the early American republic.

Gallatin emigrated from Geneva to the United States and tried to make a new life for himself. He was not impoverished, but like Hamilton was orphaned at a young age. Gallatin received an amazing education at first-rate schools in Geneva and always finished at the top of his class. For Gallatin, America meant freedom, and escape from the restrictive European city life.

Gallatin spent several years in America engaging in many small business ventures. Amazingly, this man of middle class wealth was able to buy a tract of land in Pennsylvania 7.5 times bigger than all of Geneva. Although relatively successful in his business ventures, Gallatin’s true talent was in politics and administration. Gallatin was a political leader in Pennsylvania when the Whiskey Rebellion erupted in the western territory due to Hamilton’s whiskey taxes. Gallatin was vocal and militant in his opposition to the taxes, but he avoided joining with the rebels.

For his leadership skills during the Whiskey Rebellion, Gallatin was selected to serve as a senator from Pennsylvania, but was removed on a technicality (he had been a citizen of the United States just a little less than nine years, just under the Constitutional requirement). However, Gallatin was elected to the House of Representatives in 1795 and became ones of its most capable and powerful members despite being in a minority party at the time and having a thick French accent.

Gallatin was the creator of the House Ways and Means Committee, and was the few Americans that really understood Hamilton’s economic program enough to attack it from a policy standpoint. There were some similarities between Gallatin and Hamilton’s views about economics (Gallatin also supported a national bank), but he had a decidedly different view of how to create a great American society based on economic opportunity. He was a gadfly to Hamiltonian economic “schemes” as he and other Republicans saw them.

When Gallatin was appointed treasury secretary under Thomas Jefferson he had a clear goal for how he wanted the economy to be structured and government financed. His plan was every bit as ambitious as Hamilton’s, and he was nearly as great an administrator.

Gallatin wanted the federal government to be kept at a bare minimum and he worked to abolish all internal taxes. Tariffs were kept in place as nearly the only source of government revenue, along with the sale of public lands at low prices. These tax policies served two of Gallatin’s goals for the United States. First was the elimination of public debt, which was briefly accomplished under President Andrew Jackson in 1836, and the second was to provide cheap land for settlers on the frontier.

In early American history nearly all national government expenses were for the military. So Gallatin and the Jeffersonian Republicans worked to cut it as much as much as possible. They were mostly successful, but this “success” got the country into trouble when Madison led the country to war with Britain in the War of 1812 with an underfunded and underfunded military.

It is clear from Founders and Finance that Hamilton and Gallatin had workable plans to make America a “land of opportunity” and that both had a major impact in shaping the early American economy. Hamilton’s point of view was more supportive of big business and economic development of America’s urban centers. Gallatin favored small business, vast immigration to the frontier and minimal government.

Gallatin should interest libertarians particularly because of his minimalist government approach and non-interventionist, almost pacifist views on foreign policy. But all American that believe in the strength of capitalism and the “opportunity society” that is at the core of American exceptionalism should be able to appreciate both men for their brilliance and patriotism. Although they had their fierce disagreements, either Hamilton or Gallatin could certainly give modern politicians a lesson or two about “fiscal responsibility”.